Saturday, 29 July 2006

Economy slows

The much-anticipated slowing of the US economy has arrived. From Reuters:

Gross domestic product grew at a 2.5 percent annual rate in the April-June quarter, well below Wall Street analysts' forecasts for 3 percent and less than half the robust 5.6 percent rate registered in the first quarter...

Not only was there a decrease in consumer spending on costly durables like cars, but export growth slowed, government spending was weaker and housing investment turned down.

However, inflation pressures have not receded.

At the same time, an inflation gauge favored by the Federal Reserve -- a measure of personal consumption expenditure prices minus food and energy -- jumped at a 2.9 percent rate in the second quarter, well ahead of the first quarter's 2.1 percent.

It was the fastest rate of increase for the gauge of so-called core inflation in nearly a dozen years, since the third quarter of 1994 when it jumped at a 3.2 percent rate...

Separately, the Labor Department reported its Employment Cost Index, which covers wages, salaries and benefits, climbed by a bigger-than-expected 0.9 percent in the second quarter. That was the largest increase since the first quarter of 2005, a potential warning sign on inflation.

Meanwhile, consumer sentiment held up in July.

Another report on Friday showed consumers remained hopeful about their prospects. The University of Michigan's final reading on consumer sentiment rose to 84.7 in July from an initial reading of 83.0, only modestly lower than June's 84.9 reading.

While the US economy slows, the data from the euro zone also suggest some potential slowing, as M3 grew 8.5 percent percent year-on-year in June, down from 8.8 percent in May and less than expected. M1 and private sector loan growth also slowed.

Meanwhile, the Japanese economy is still "crawling out of deflation". From Reuters:

The nationwide core consumer price index (CPI), which excludes fresh food, rose 0.6 percent in June from a year earlier, matching market expectations...

Core CPI in the Tokyo area for July, announced a month before the nationwide figures, was up 0.4 percent from a year earlier, also matching forecasts...

Separate data showed retail sales in June rose 0.4 percent from a year earlier. Compared with May, retail sales rose 0.1 percent on a seasonally adjusted basis.

The seasonally adjusted unemployment rate rose to 4.2 percent in June from 4.0 percent in May and higher than a market consensus forecast of 4.0 percent...

The jobs-to-applicants ratio for June rose to 1.08 from 1.07 in May, meaning 108 jobs were available per 100 applicants. The last time the figure was 1.08 was in July 1992...

Overall household spending in Japan fell 2.2 percent in June from a year earlier in price-adjusted real terms, falling more than a median market forecast of a 1.7 percent decline.

Friday, 28 July 2006

US factory orders up but new homes sales down, Europe looks strong for now

The data on the US economy yesterday were mixed. Reuters reports that durable goods orders were strong in June:

While new orders for U.S.-made durable goods rose 3.1 percent, much more than expected, in June, it was boosted by demand for volatile defense and transportation orders, Commerce Department data showed.

Capital goods orders excluding aircraft and defense, a good barometer for business spending, rose only 0.4 percent, compared with Wall Street expectations for a 1.1 percent rise...

Durables goods orders excluding transportation rose a larger-than-expected 1.0 percent, the ninth gain in the last 11 months.

And the labour market is tight:

In a sign of tight labor markets, workers filing new claims for state jobless benefits fell to the lowest level in six weeks, a Labor Department report said.

New applications for state jobless benefits fell to a seasonally adjusted 298,000 last week, from 305,000 claims in the previous week. Economists polled by Reuters were expecting a rise in claims.

But the housing market continues to weaken:

In another Commerce Department report, new single-family home sales fell a surprising 3 percent, the department said, to a seasonally adjusted annual rate of 1.131 million units. Analysts had expected a 1.160 million rate...

Along with the drop in new U.S. home sales, the median home price fell for the second month in a row to $231,300, but it was still above the $226,100 median price in June 2005.

In addition, the number of homes available at the current sales rate rose to a 6.1 months' supply, the highest since March. There were 566,000 new homes for sale at the end of the month, a record high.

But in the UK, the housing market appears to be pretty resilient. Again from Reuters:

The number of mortgage approvals for home purchases in Britain rose 22 percent in June from a year ago, suggesting house prices will keep rising, British Bankers' Association data showed on Thursday.

Reports like this are raising calls for interest rates hikes, most recently by the National Institute for Economic and Social Research, as Reuters reports.

The economy is picking up faster than expected and with inflation likely to remain above target for some years, the Bank of England should raise rates sooner rather than later, a think-tank said on Friday...

"There's little to be gained by delaying the rise until late in the year," NIESR Director Martin Weale, told a news conference. "Given that we have inflation staying above target and given rates are expected to rise I cannot see a strong case for waiting."

Meanwhile, unemployment fell in France in June. From AFX/Forbes:

France's seasonally-adjusted unemployment rate fell to 9.0 pct in June from 9.1 pct in May, the Labour Ministry said.

The number of registered unemployed who are 'immediately available' for work fell 26,500 to reach 2,186,000 on a seasonally-adjusted basis.

And consumer confidence has been quite good in Germany. From Bloomberg:

GfK's confidence index, based on a July survey of about 2,000 people that aims to forecast household spending one month ahead, climbed to 8.6 from a revised 8 in the previous month, the market-research company said in an e-mailed statement today. That was the highest level since November 2001.

But there is underlying ambivalence.

Gfk's sub-index measuring readiness to spend rose 3 points to 57.5, the highest level since the index started in 1980, and a gauge tracking households' income expectations rose 5 points to minus 3.8. A measure of consumers' assessment of the economy fell 5 points to 15.6.

"Evidently, consumers worry that the positive signs for the economy are going to be short-lived," GfK said in the statement.

Thursday, 27 July 2006

Beige Book and other reports paint mixed picture

The only major piece of economic news from the US yesterday was the Federal Reserve's Beige Book summary of economic conditions, which reports "continued economic growth during June through mid-July, with numerous individual reports pointing to evidence that the pace of growth has slowed". Retail sales were reported as slightly weaker and residential real estate markets cooled. However the manufacturing sector was reported to be strong. Increases in wages and in prices of final goods and services were described as modest.

The economic news from Europe yesterday was relatively downbeat, with German business confidence falling in July:

German business confidence fell from a 15-year high in July as record oil prices and rising interest rates threatened to slow growth in Europe's largest economy.

The Ifo economic research institute in Munich said today its confidence index, based on responses from 7,000 executives, slid to 105.6 from 106.8 in June. Economists expected a reading of 106, the median of 45 estimates in a Bloomberg survey showed.

...and British factory orders falling, albeit at a slower pace.

Factory orders fell at a slightly weaker pace in July and manufacturers remained upbeat about boosting future output, a survey showed on Wednesday.

The Confederation of British Industry said its monthly manufacturing order books balance fell to -11 in July from -12 in June.

However, the latest trade data show that Asia is still experiencing boom-like conditions. Japan reported yesterday that its trade surplus fell 5.9 percent in June from a year earlier to 807.9 billion yen, but mainly due to the soaring cost of crude oil. Exports rose 14.4 percent while imports rose 18.2 percent.

South Korea also saw its trade balance affected by higher oil prices. Its June current account surplus halved from a year ago to US$1.1 billion. Its June trade surplus was US$2.9 billion. Exports rose 18.6 percent while imports rose 21.9 percent.

Elsewhere in Asia, Singapore, which had seen its non-oil domestic exports grow 17 percent in June, reported yesterday that manufacturing output in June grew 22.5 percent on a year-on-year basis or 19.3 percent on a seasonally-adjusted month-on-month basis.

Wednesday, 26 July 2006

US data better than expected

Yesterday's economic news from the US surprised on the upside. From Reuters:

The Conference Board said its index of consumer sentiment climbed to 106.5 in July, up from 105.4 in June... Analysts had expected the index to fall to 104.0...

The pace of existing home sales in the United States fell 1.3 percent in June, to the lowest rate since the beginning of the year, as sales of condominiums tumbled and price increases were the weakest in 11 years... Analysts had expected home resales to slow even further...

There were a record 3.73 million homes for sale at the end of June, representing 6.8 months' supply, compared to 6.4 months at the end of May.

Also released on Tuesday, the Federal Reserve Bank of Richmond's monthly manufacturing index for July rose to 12 from a reading of 4 in June, beating economists' forecasts.

U.S. chain store sales rose 2.1 percent in the third week of July from a year earlier, boosted by some back-to-school buying, according to Redbook Research.

Things also looked a little hotter in Europe yesterday. From Bloomberg:

Prices in Europe's largest economy climbed 0.4 percent from a month earlier, when they rose 0.2 the Federal statistics office in Wiesbaden said in a faxed statement today. Inflation slowed to 1.9 percent from 2 percent in June. That matches the median of 42 economist forecasts in a Bloomberg News survey...

French business confidence increased in July to a five-year high as consumer spending rose and expansion in European economies boosted exports, Paris-based Insee said today...

The South Korean economy, however, slowed in the second quarter. From The Korea Times:

The economy grew 0.8 percent in the second quarter from the previous quarter, the lowest quarterly growth since the first quarter of last year, fueling concerns it is losing its growth momentum, the Bank of Korea (BOK) said on Tuesday.

Tuesday, 25 July 2006

Mixed news from Europe, trade talks collapse

There was mixed news from Europe yesterday.

Euro zone new industrial orders rose 2.3 percent in May from April and 14.2 percent year-on-year, well above forecasts. On the other hand, the Belgian National Bank's business confidence indicator fell to 5.4 in July from June's record high of 10.1, pointing to a weaker German Ifo business climate index, while the Confederation of British Industry's distributive trades survey indicated that retail sales growth eased slightly in July.

However, from a longer term perspective, the big disappointment of the day must be the failure of the WTO negotiations in Geneva on trade liberalisation.

A five-year global effort to liberalise world trade collapsed in acrimony, driving a stake into lofty ambitions to free up global commerce and help developing nations to climb out of poverty.

The collapse of talks among six key players from the 149-nation World Trade Organisation drove its chief Pascal Lamy to recommend an indefinite freeze in the faltering negotiations.

Monday, 24 July 2006

Pause for thought on Fed pause

Last week saw data released showing that inflation persists in the United States economy. Whereas in the past such news had more often than not triggered falls in bond and stock prices, last week, markets essentially shrugged off the data.

On 19 July, the Labor Department reported that the consumer price index (CPI) rose 0.2 percent in June, in line with expectations. However, the core CPI that excludes food and energy rose 0.3 percent, higher than the 0.2 percent expected, and maintaining the same pace as the preceding three months.

It so happened that later that same day, Federal Reserve Chairman Ben Bernanke gave his testimony to the Senate Committee on Banking, Housing, and Urban Affairs. In that testimony, Mr Bernanke said that "the anticipated moderation in economic growth now seems to be under way". This "should help to limit inflation pressures over time". He also said that the Federal Reserve "must take account of the possible future effects of previous policy actions".

The testimony was enough for markets to reach their own conclusion: The Federal Reserve hopes to pause in its tightening campaign soon. Expectations for a rate hike in August fell immediately after the testimony while US bond and stock prices rose and the US dollar fell.

Stock investors would also have been further encouraged by Mr Bernanke's assessment that "the economy should continue to expand at a solid and sustainable pace" even as core inflation declines. Clearly, the Federal Reserve is intent on, and believes it is capable of, achieving a soft landing in the economy, probably similar to what was achieved in 1994-95 (see my earlier commentary entitled "Despite weakness in US housing, recession not yet inevitable"), if not better.

If everything goes as smoothly as Mr Bernanke says, the outlook for the economy and for markets is reasonably sanguine. However, there are, in my opinion, some risks to a sanguine outcome even if it is true that the Federal Reserve thinks it can pause soon.

The first risk is that the Federal Reserve's forecast for the economy turns out to be wrong. The central bank is trying to steer the economy along a tightrope: Contain inflation on the one hand without inducing a recession on the other. With sentiment on the housing market continually deteriorating, many doubt that a recession can be avoided. And even if it can, doubts remain over whether inflation can be tamed if the Federal Reserve indeed pauses soon. While the current federal funds rate of 5.25 percent looks high compared to the 12-month core inflation rate of 2.6 percent, it is less than one percent above the overall inflation rate of 4.3 percent.

The second risk, especially for investors but also for the economy, is the way markets react to events and data. According to the Federal Reserve's own forecast, core inflation as measured by the price index for personal consumption expenditures excluding food and energy is projected to continue to increase for the next few months from 2.1 percent in May to between 2.25 to 2.5 percent by the fourth quarter and to fall back to 2 to 2.25 percent by the fourth quarter of 2007. But the latter range is still around the current core PCE inflation rate. There is every possibility that markets may get uneasy with such an inflation trajectory and take inflation expectations and bond yields higher, especially if the overall inflation rate also remains persistently high. Incidentally, that would be a reversal of the low-interest-rate conundrum of 2004-2005, which also serves as a reminder of how market reactions can deviate from official forecasts and undermine official policy.

The third risk is how the Federal Reserve itself reacts to the data and markets. While various Federal Reserve officials have emphasised that they need to take into account policy lags, market skepticism of the success of monetary policy, especially with a new Federal Reserve chairman, might force them to act more decisively than they currently plan. And remember that the risk here is two-way: while some may feel that the Federal Reserve needs to do more to contain inflation, others may react to signs of economic slowing to urge the central bank to maintain a more accommodative monetary stance at the risk of higher inflation. Would the Federal Reserve and its new chairman be able to resist calls for action that takes it away from its preferred path?

The Federal Reserve's perceived intent to pause may have helped markets recover somewhat from their May and early June turmoil, but I think the risks outlined above should give investors themselves pause for thought.

Saturday, 22 July 2006

China acts to cool economy, others may do so too

China has taken additional steps to cool its economy. From AFP/CNA:

The People's Bank of China said the required deposit reserve ratio for commercial lenders would rise 0.5 percentage point to 8.5 percent on August 15 in a bid to cut the amount of money fueling a liquidity-driven investment boom.

This comes on the back of reports that China's real estate index rose 1.06 points from May to 102.93 points in June and house prices rose 5.8 percent in June over the same period last year. Meanwhile, a report by the National Development and Reform Commission sees an acceleration of domestic consumption in the second half of the year while the Asian Development Bank expects China's growth to hit 10.1 percent this year while East Asia as a whole sees 7.5 percent growth.

India, the other big emerging Asian economy may also need cooling. Again from AFP/CNA:

India's inflation rate fell but analysts still forecast the central bank would hike a key interest rate next week to restrain prices in the fast-growing economy...

Inflation slipped to 4.68 percent for the week ended July 8 from 4.96 percent the previous week due to cheaper food prices, official data showed.

But the rate measured by the wholesale price index ... was up more than two-tenths of a percentage point from its year-ago level of 4.46 per cent.

The biggest economy in Asia, Japan, is not as hot, its all-industry index falling 0.2 percent in May, while the biggest economy in the world, the US, could be slowing as the Economic Cycle Research Institute's leading index for last week was flat at 136.9

But Europe is seeing good growth. From Reuters/CNN:

France said household spending rose at its fastest pace in a year in June, lifting expenditure for the April-June period as a whole 1.5 percent, after a 1.2 percent rise in the previous quarter in the euro zone's second-largest economy.

Britain, the first major European economy to produce an estimate of second-quarter GDP, said gross domestic product rose at its fastest clip in two years in the period, up 0.8 percent from the previous quarter. Britain trades heavily with the euro zone...

Italy's July 9 football World Cup win gave a boost to consumer morale in July, according to thinktank ISAE on Friday, which said its consumer confidence index rose to 108.7 from 106.9 last month.

Friday, 21 July 2006

Central banks uncertain as US leading index points to slowdown but UK retail sales soar

We are back to the slowdown story for the US economy. From Reuters:

The Index of Leading Economic Indicators rose 0.1 percent in June to 138.1, just below market expectations for a 0.2 percent rise, the private industry research group, Conference Board, said in its monthly report.

June's mild increase follows two straight months of declines, and supports economists' opinions the economy will cool further in the second half of 2006...

The Philadelphia Federal Reserve Bank said its business activity index for the Mid-Atlantic region fell to 6.0 in July from 13.1 in June. That was its lowest since January and well below forecasts of a dip to 12.0.

But as usual, there were some conflicting signals as well.

The Philadelphia's Fed index of prices paid by manufacturers edged up to 50.3 in July from 48.7 in June, while the new orders gauge softened to 10.1 from 17.7. Nonetheless, the survey's employment barometer jumped to 12.8 from 6.8...

In other data, the number of people filing initial claims for U.S. unemployment benefits last week fell 30,000 to the lowest level in a month because of fewer claims from the automobile industry, Labor Department figures showed.

Mixed signals like these have obviously been noted by the FOMC.

Minutes from the FOMC's June meeting revealed that there was "significant uncertainty" for U.S. Fed officials regarding future interest rate steps. Fed officials said they wanted to see more data before deciding whether any more tightening was needed.

Yesterday also saw the release of the minutes of the Bank of Japan's meeting in June. Reuters reports:

The Bank of Japan held off on raising interest rates from zero at a board meeting in June because it wanted to monitor factors such as global markets and the U.S. economy, minutes released on Thursday showed.

The OECD thinks that the BoJ would do well to keep holding off further interest rate increases. From AFP/CNA:

The OECD has warned Japan's central bank against jeopardising the economic recovery by raising interest rates too quickly and called on the government to take urgent steps to cut public debt...

"A significant rise in market interest rates that is too early or too large would pose important risks to both economic activity and the fiscal situation," said the OECD, which advises its 30 rich member countries on economic issues.

The Bank of England, on the other hand, may not be able to hold off raising interest rates much longer. Retail sales jumped 0.9 percent in June and M4 money increased 1.6 percent in June from May and 13.7 percent from a year earlier, the biggest annual rise since November 1990. And with mortgage approvals hitting a record high in June, the housing market looks likely to be well supported despite some easing in mortgage lending.

All of which leaves me wondering whether the BoE paused too soon, and whether the Fed will follow the same path.

Thursday, 20 July 2006

Inflation looks bad, markets look to Fed

Yesterday's US economic news and market action proved to be interesting. Reuters reports that the inflation news was bad:

U.S. core consumer prices rose more than expected in June...

The Labor Department attributed over half of the 0.3 percent monthly advance in its core consumer price the rising cost of shelter.

It was the fourth straight 0.3 percent rise in core consumer prices, which Wall Street had expected to increase by 0.2 percent. But overall consumer prices gained 0.2 percent, as expected, as energy costs declined 0.9 percent in June...

The Labor Department report demonstrated a trend of steadily rising consumer prices in recent months. Core consumer prices have advanced at an annual rate of 2.6 percent rate over 12 months, 3.2 percent in the past six months and 3.6 percent in the past three months. It was the highest six-month rate since June 1995...

Meanwhile, the Labor Department said average weekly earnings rose 0.6 percent from May to June, but average hourly earnings have fallen 0.6 percent over the past year.

But the housing market is slowing.

June housing starts fell 5.3 percent in June to a 1.850 million unit annual pace from a downwardly revised 1.953 million unit pace in May. U.S. single-family housing starts fell 6.5 percent to an annual pace of 1.486 million units, the slowest since November 2004...

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 4.6 percent.

So how is the Federal Reserve likely to respond?

Fed Chairman Ben Bernanke said at a congressional hearing that stubbornly high inflation could harm the U.S. economy, but the Fed is expecting both economic growth and inflation to moderate. He said the economy appears to be "in a period of transition" to slower rates of growth and this moderation could reduce price pressures.

And that was something that markets certainly responded to.

Bond and stock markets rallied while the dollar sold off sharply on the central bank chairman's comments.

If the Federal Reserve sounds somewhat dovish, the Bank of England has not been too hawkish either. Again from Reuters:

Interest rates seem likely to remain at 4.5 percent for some time, minutes to the Bank of England's July policy meeting suggested on Wednesday, with all seven committee members voting for no change.

But the European Central Bank still looks likely to raise rates soon, especially after the latest data on producer prices in Germany. From Bloomberg:

Producer price inflation in Germany, Europe's largest economy, rose more than economists expected last month as the cost of energy and raw materials increased.

Goods from plastics to newsprint were 6.1 percent more expensive in June than a year earlier, the Federal Statistics Office in Wiesbaden said in a statement today. Economists forecast a 5.9 percent gain, according to the median of 35 estimates in a Bloomberg News survey. From May, prices rose 0.3 percent.

Wednesday, 19 July 2006

Data from US and UK renew inflation fears, China economy accelerates, but surveys point to slowdown

The focus yesterday was on US PPI but there were other data released yesterday. From Reuters:

U.S. producer prices rose a steeper-than-expected 0.5 percent last month as food prices jumped, the government said on Tuesday, leading markets to boost bets for another Federal Reserve interest rate hike.

However, the core producer price index, which strips out volatile food and energy costs, rose just 0.2 percent, matching Wall Street forecasts and helping to temper inflation fears...

The National Association of Home Builders, an industry trade group, said its index of home-builder sentiment dropped 3 points to 39 in July, its lowest since December 1991.

Two other reports showed U.S. chain store sales slowed last week from a week earlier, suggesting warmer-than-normal weather and high gasoline prices deterred shoppers...

Separately, the U.S. Treasury Department said net inflows of capital into the United States rose to $69.6 billion in May. Analysts said the increase, which was larger than expected, showed demand for dollar-based assets remained solid.

The theme of higher inflation but slower growth was repeated in Europe. Reuters on UK inflation:

A record increase in household utility bills pushed the inflation rate further than expected above target to a nine-month high in June, boosting expectations of an interest rate rise...

The Office for National Statistics said the consumer price index rose 0.3 percent last month, pushing up the annual rate to 2.5 percent, much higher than the 2.3 percent forecast by analysts and the strongest since September 2005.

FT on Germany's ZEW index:

German investor confidence has dropped unexpectedly for the sixth month running, highlighting fears that the country’s economic upswing may soon fade and signalling disappointment with Berlin’s reform agenda.

The economic sentiment indicator compiled by the Mannheim-based ZEW institute dropped further than expected by 22.7 points in July to 15.1 points – the lowest since May 2005 and well below the index’s historical average of 35.2 points.

But meanwhile, Japan's service economy grew in May. From Bloomberg:

Japan's service economy unexpectedly expanded in May, as demand for spas and beauty care rose, signaling non-manufacturers are contributing more to an economy that's heading for its longest postwar expansion.

The tertiary index, a gauge of demand for services including retail, travel and media, rose 0.5 percent from April, the trade ministry said today. The median forecast of 24 economists surveyed by Bloomberg was for a 0.3 percent decline...

Wages rose a revised 0.5 percent in May from a year earlier, a labor ministry report showed today... Wages adjusted for inflation slipped a revised 0.1 percent in May.

And growth certainly has not slowed in China. From AFP/CNA:

China's economy expanded at its fastest pace in a decade with growth of 11.3 percent in the second quarter, official data showed Tuesday, exceeding expectations and possibly signalling the need for new cooling measures...

China's consumer price index -- the main gauge of inflation and a key factor in determining the temperature of the economy -- rose 1.4 percent in the second quarter of the year compared with the same period in 2005.

The index was up 1.5 percent in June alone and 1.3 percent for the six months, according to the bureau.

But Andy Xie thinks that a stormy summer lies ahead for Asia.

Softening global demand and rising oil prices are squeezing export-dependent Asia. If current high oil prices persist until the year-end, the region could suffer income loss of 1.2% of GDP. Moreover, if US imports from the region stop growing in 2H06, I estimate that the region could see its GDP growth rate cut by a further 1.2 percentage points directly...

The region’s governments still want to keep interest rates low to help growth. The net effect of this is an ‘inflation tax’ on the region’s consumers to subsidize consumers in developed economies. This encourages the major central banks to take a gradualist approach to raising interest rates, which in turn encourages oil speculation and puts more pressure on Asia...

Asian financial markets look to be entering their most difficult period for five years. I believe that a considerable shake-out is likely over the summer. In particular, as investors are still long Asia on a bullish outlook for the global economy, which is likely to be wrong, in my view, the unwinding could be quite painful for Asian assets. Indeed, if the Fed flip-flops again and turns hawkish on inflation, we could see a capitulation sell-off in the summer.

Indeed, the July Merrill Lynch survey of fund managers found that most investors polled expected the global economy to weaken over the next 12 months. Investors declared themselves more risk averse than they have been in years with a net of 12 percent seeing emerging markets equities as the least favourable compared to a net 6 percent who saw them as the most favorable in June. Asia ex-Japan was also expected to see a weaker economy and higher inflation but no recession.

Tuesday, 18 July 2006

Not all data point to slowdown

While the data reported on Friday pointed to a slowdown in US consumer spending, there are still signs of strong growth elsewhere in the global economy.

In the US itself, industrial production was strong in June, reports Reuters.

Output at U.S. factories, mines and utilities rose by a bigger-than-expected 0.8 percent in June and capacity use also topped expectations, a report showed on Monday in a sign that a hot economy could weigh on an inflation-wary Federal Reserve.

Capacity use rose to 82.4 percent, the highest rate since 82.5 percent in June 2000, the Fed reported on Monday. Analysts were expecting a 0.4 percent gain in industrial production and a capacity use rate of 81.9 percent...

However, an index of manufacturing growth in New York in July fell sharply on declines in new orders and shipments in October. The New York Federal Reserve Bank's Empire State general factory conditions index dropped to 15.64 in July from June's 29.01.

European industrial production was also relatively strong in May, rising 1.6 percent in the euro zone and 1.2 percent in the EU25, or 4.9 percent and 4.7 percent respectively on a year-on-year basis. But the growth is being accompanied by relatively high inflation, euro zone inflation registering 2.5 percent in June and EU25 inflation registering 2.4 percent; both rates were unchanged from May.

Meanwhile, in the UK, house price inflation appears to be unabated. Property website Rightmove reported that asking prices rose 10.6 percent in the period from early June to early July compared with a year earlier or 2.9 percent on the month, while a Royal Institution of Chartered Surveyors survey showed that house prices rose at their fastest pace in more than two years in the three months to June.

Saturday, 15 July 2006

US consumer sentiment, retail sales fall, oil prices climb to record high

The US consumer slowdown looks to be under way. From Reuters:

The University of Michigan's preliminary reading on consumer sentiment in July was 83.0, down from June's final 84.9 reading, said sources who saw the subscription-only report...

This data, coupled with news from the Commerce Department that June retail sales fell 0.1 percent -- the first decline since February -- raised concerns of a economic slowdown.

... When gas sales were stripped away, retail sales fell 0.2 percent.

Retail sales excluding motor vehicles and parts advanced 0.3 percent compared with an upwardly revised 0.7 percent increase in May, previously reported as a 0.5 percent gain...

Sales of motor vehicles and parts dropped 1.4 percent and when cars, parts and gasoline were excluded, retail sales edged up by 0.1 percent.

The news on the inflation front was a little better though.

The University of Michigan's preliminary July reading on one-year U.S. inflation expectations was 3.1 percent, down from 3.3 percent in June.

Median expectations for inflation over a five-year horizon edged down to 2.8 percent in July from 2.9 percent in June...

It got more goods news on the inflation front on Friday after Labor Department data showed that import prices rose just 0.1 percent last month, below expectations, as petroleum costs slipped for the first time in fourth months.

Excluding a 1.4 percent drop in the cost of petroleum imports, import prices rose 0.4 percent, partly reflecting a big jump in metals prices, the Labor Department said.

But with the jump in oil prices to record highs in recent days, that may not be true for long.

Crude oil rose to a record as concern mounted over escalating violence in the Middle East, the source of 30 percent of the world's oil...

Crude oil for August delivery rose 33 cents, or 0.4 percent, to close at a record $77.03 a barrel on the New York Mercantile Exchange. Futures touched $78.40, the highest intraday price since trading began in 1983. Prices are up 4 percent this week and are 33 percent higher than a year ago...

Brent crude oil for August settlement rose 58 cents, or 0.8 percent, to close at a record $77.27 a barrel on the London-based ICE Futures exchange. Futures touched $78.03 a barrel, the highest intraday price since the contract was introduced in 1988.

And some of the analysts in the report say oil at US$100 a barrel no longer looks far-fetched.

Friday, 14 July 2006

Bank of Japan ends zero interest rates

As widely expected, the Bank of Japan raised interest rates today. From AFP/CNA:

The Bank of Japan on Friday decided to end over five years of zero interest rates in a watershed decision for the world's number two economy which has finally escaped from its long deflationary spiral.

The unanimous decision by the central bank's policy board to raise its key rate by a quarter point to 0.25 percent marks a return to a more normal monetary policy and reflects a trend of rising interest rates around the globe.

The Bank of Japan said in a statement that it would continue to raise interest rates "gradually" in light of economic developments but would probably keep them "very low" for some time.

Predictably, there was little reaction to the move from markets.

The yen gained after the BoJ's announcement. The dollar eased to 115.60 yen, from 115.71 shortly before the decision was unveiled, while there was little impact on the stock market, which continued lower on concerns over rising oil prices.

The BoJ's move was described by the above report and others as a watershed. Perhaps so.

But it is also possible that the BoJ's tightening campaign will be even more gradual than the Fed Reserve's. And we all know how long it took for Fed tightening to make a significant impact on markets and the economy.

Thursday, 13 July 2006

US, Japan trade, eurozone GDP and oil prices point to growing global economy

I think MarketWatch got it right when it reported the US trade news: it's reflecting a growing global economy.

The U.S. trade deficit widened by 0.8% in May to $63.8 billion as both imports and exports set monthly records, the Commerce Department said Wednesday.

Reflecting a growing global economy, exports increased 2.4% to a record $118.7 billion, the biggest percentage gain since December 2004.

Record petroleum imports -- due to record prices and the largest quantity in 18 months -- helped to push up imports by 1.8% to a record $182.5 billion. The non-petroleum deficit fell to $43.2 billion, its lowest level in nine months...

After adjusting for inflation, real imports were flat and real exports rose 2%.

Whether the global economy can sustain its current growth rate is still uncertain, but at least the European Commission has largely maintained its growth forecast for the eurozone.

The commission cut its forecast for quarter-on-quarter growth in the three months to June to between 0.4 percent and 0.8 percent from previously forecast 0.5 percent to 0.9 percent, and also cut its outlook for growth in the three months to September to between 0.3 percent and 0.7 percent, also down from 0.5 percent and 0.9 percent. It raised its forecast for growth in the final quarter to 0.5 percent 1 percent from 0.4 percent to 1 percent.

Figures released by the EU's Eurostat agency showed gross domestic product in the eurozone during the first three months of this year was 0.6 percent higher than in the fourth quarter of last year, and 2 percent higher than in the first quarter of 2005.

However, the European Commission warned about global imbalances:

A "disorderly unwinding of global imbalances" could hit the euro area hard, the commission said in its report, warning that the "unprecedented size and duration" of these imbalances meant they could not go on indefinitely.

Tell that to the Japanese, whose current account surplus widened in May.

Japan's current account surplus widened for the third month in four as overseas demand for automobiles rose and companies brought home profit from abroad.

The surplus rose 15.9 percent in May to 1.61 trillion yen ($14 billion) from a year earlier, the Ministry of Finance said today in Tokyo...

The trade surplus...expanded 25 percent to 399.6 billion yen, the first time it widened for 19 months, the government said. Exports rose 18.8 percent, the largest gain since February, and imports advanced 20.1 percent.

While the trade data is good news for the Japanese economy, signs of rising inflation are not necessarily bad news either.

The corporate goods price index (CGPI) rose 3.3 percent in June from a year ago, BOJ data showed on Wednesday...

From a month earlier, the CGPI, which tracks trends in wholesale prices of goods, fell 0.1 percent compared with a median market forecast for a flat reading, pushed lower by a drop in non-ferrous metal prices.

But those prices, along with that of oil, continued to register sharp gains year-on-year -- a sign that the economy is shaking off seven years of deflation, blamed for crimping consumer spending and business investment.

Speaking of oil, its price does not look as though it is about to come down significantly anytime soon, flirting with US$75 a barrel again yesterday.

Oil prices jumped to $75 a barrel Wednesday on concerns about instability in the Middle East...

In its weekly petroleum report, the Energy Department said commercially available crude-oil inventories shrank by 6 million barrels to 335.3 million barrels. Crude supplies are still 2 percent higher than last year...

In its monthly report, the IEA trimmed its global oil-demand growth forecast for this year to 1.21 million barrels a day, but in its first outlook for 2007 it estimated demand would grow by 1.57 million barrels a day to a total of 86.37 million barrels a day.

The energy watchdog also said world oil demand is expected to increase by 2 percent per year in the next five years. Supplies are also expected to increase, but the IEA saw little prospect for significant price cuts.

Wednesday, 12 July 2006

Global economic data show slower growth, higher inflation

If the outlook for consumer spending is not too rosy in the United States, it looks little better elsewhere.

The UK saw retail sales growth slow in June.

The BRC said like-for-like sales rose by 2.3 percent in June compared with a year ago, down from 3.6 percent in May and the weakest since a decline of 1.4 percent in March.

Total sales, which include new floor space, also grew less than the previous month, up 4.7 percent after May's 6.2 percent -- that too the weakest reading since March...

Still, the BRC said the three-month underlying trend rate showed total sales rose a solid 6.8 percent on the year, the strongest since October 2002, while like-for-like sales were 4.1 percent higher, the strongest since August 2002.

Meanwhile, consumer confidence in Japan fell in June while confidence in China fell in the second quarter.

Unlike the Asian economies, however, Britain does not get as much relief from export growth; its goods trade gap widened in May. Reuters reports:

The Office for National Statistics said the goods trade gap widened to 6.753 billion pounds in May from a downwardly revised 5.568 billion in April...

Oil accounted for around half of the deterioration...

Total goods imports rose 3.9 percent to hit a new record of 27.947 billion pounds, driven by higher imports of cars, capital goods and aircraft. Exports, meanwhile, dipped 0.6 percent. The ONS said its estimate of the trend was that the gap was widening...

Britain had a 2.335 billion pound surplus in the trade in services, up from 2.141 billion in April, taking the total trade deficit to 4.418 billion pounds from 3.427 billion the previous month.

Some positive news yesterday came from Canada, where new home construction picked up by 4.5 percent in June. However, construction activity was expected to moderate in the second half of the year. Expectations of a general economic slowdown led the Bank of Canada to leave interest rates unchanged at 4.25 percent yesterday.

Even as signs of economic weakness appear around the globe though, let's not forget that inflation is still a major global concern. Germany's Federal Statistical Office reported yesterday that its wholesale price index rose by 0.5 percent in June from the previous month and by 5.3 percent from a year earlier, the highest year-on-year rate since November 2000.

Tuesday, 11 July 2006

US consumer credit up but spending may slow, positive European data marred by fall in German exports

Outstanding US consumer credit continued to rise in May. MarketWatch reports:

American borrowers pushed up overall outstanding consumer credit by 2.4%, or $4.4 billion, to $2.173 trillion, the Fed said Monday. Credit cards and other forms of revolving debt jacked up the overall number. U.S. consumers added $6.7 billion in revolving debt in May, up 10% from the prior month to a total of $812 billion. Nonrevolving debt like automobile loans, meanwhile, fell by 2%, or $2.2 billion, to $1.36 trillion...

In a separate report Monday, the Commerce Department said inventories at U.S. wholesalers rose 0.8% in May while sales increased 1.6%. The inventory-to-sales ratio fell to a record-low 1.15 in May. The typical wholesaler has about 35 days of sales on hand.

But mortgage finance company Freddie Mac thinks the housing market will cool and slow US consumer spending. From Reuters:

"In the second half of the year, the markets, businesses, and consumers will need to adjust to an economy in transition from above trend growth driven in large part by a housing boom to below trend growth exacerbated by higher energy prices and a cooling housing market," it added.

In releasing June retail sales data, SpendingPulse, a retail data service of MasterCard, suggests that there has already been some cooling in spending. From Reuters:

U.S. retail sales, excluding autos, rose on a seasonally adjusted basis in June, but at a slow enough rate to suggest retail sales are weakening overall, according to final data released by SpendingPulse on Monday.

Final seasonally adjusted sales for June totaled $284.8 billion, up 6.2 percent from a year earlier, said SpendingPulse.

Final June seasonally adjusted sales rose 0.4 percent from May. That compares with May final sales, which rose 0.2 percent from April...

June total sales excluding auto and gasoline sales rose 6.1 percent on a seasonally adjusted basis from a year earlier, a rate which has generally been slowing and reflects the impact of high gasoline prices, SpendingPulse said.

The UK economy, however, reminds us that things can always turn around relatively quickly. Yesterday, the Department for Communities and Local Government reported that house price inflation picked up to 5.6 percent in May from 5.1 percent the month before, while the Office for National Statistics said that producer output prices rose 3.3 percent on the year, the fastest rate since last September, and core output prices, which exclude food, drink, tobacco and petroleum, were up 2.9 percent, the strongest rate in one and a half years.

Meanwhile, on the continent, French industrial output surged 2 percent in May, but otherwise, the news was not so good. Exports from Germany fell 1.5 percent in May while research group Sentix's euro zone index of investor sentiment fell to 21.8 in July from 22.2 in June.

But research from ABN Amro suggests that the outlook for the French economy may not be so good after the result of Sunday's World Cup final. From MarketWatch:

The bank found that past figures show economic growth among soccer world champions outstrips growth in the losing finalist country, with an average "bonus" of 0.7% additional economic growth versus the prior year's gain. The losing country -- this year, France -- tends to suffer an average 0.3% loss compared with the previous year's growth.

On the other hand, if there is any validity to the findings, it looks like the Italians will have more to cheer about.

Monday, 10 July 2006

Asian stock markets turn around

Like the Italians in yesterday's World Cup final, Asian stock markets today had to overcome an early deficit before coming out winners.

The economic data that came out of Asia today were generally positive.

In Japan, the Bank of Japan reported that bank lending rose 1.8 percent in June from the same month a year earlier, the biggest gain since March 1996, while the Cabinet Office reported that machinery orders fell 2.1 percent in May, less than expected and after climbing at their fastest pace in more than three years in April. Notwithstanding continued resistance in some quarters in the Japanese government, a hike in interest rates later this week by the BoJ is still widely expected.

Meanwhile, in China, the Ministry of Commerce reported that China's trade surplus widened to a record $14.5 billion in June from $13 billion in May as exports surged 23.3 percent from a year earlier while imports rose 18.9 percent. On the other hand, the China Securities Journal reported today that M2 expanded 18.4 percent in June, the slowest pace in six months.

Saturday, 8 July 2006

June job growth weaker than expected in US and Canada, economic outlook brighter for Japan and Europe

Yesterday's US employment report may be softer than expected but it failed to provide a clear signal on the inflation front. From Reuters:

U.S. employers added a fewer-than-expected 121,000 workers to their payrolls last month, but the jobless rate stayed at a five-year low and hourly earnings rose, a government report showed on Friday.

The Labor Department's employment report was a modest improvement over May's revised gain of 92,000 jobs and pointed to a cooling of U.S. economic growth.

However, the 3.9 percent year-over-year gain in average hourly earnings -- the largest in five years -- and the 4.6 percent unemployment rate heightened expectations that rising wages may weigh on the inflation-wary Federal Reserve...

Average hourly earnings rose 8 cents, or 0.5 percent, while the average work week rebounded from a May dip to match a three-and-a-half year high struck in April, the report showed.

Canada's employment situation was also weaker than expected in June, the economy losing 4,600 jobs. This, though, came after a huge 96,700 jump in jobs in May.

Elsewhere, the news was better yesterday. Japan's Cabinet Office raised its economic growth forecast to 2.1 percent for the current fiscal year to March 2007 from 1.9 percent previously, while Germany saw its industrial output rise 1.5 percent in May, the highest gain since April last year.

The May OECD composite leading indicators seem to be telling a similar story.

Moderate expansion lies ahead in the OECD area according to the latest composite leading indicators (CLIs). May data show improved performance in the CLI’s six month rate of change in the Euro area and Japan but weakening performance in Canada and the United States. The latest data for major OECD non-member economies point to slightly moderating expansion in China, improved outlook for India and Russia, while the CLI for Brazil signals a weaker outlook.

Friday, 7 July 2006

US service sector slows, ECB and BoE leave rates unchanged, BoJ may not

The US service sector slowed in June, but apart from that, yesterday's data did not indicate much of a slowdown in the US economy. Reuters reports:

The Institute for Supply Management said on Thursday its non-manufacturing business activity index fell to 57.0 in June, the lowest level since January. The June figure was below May's 60.1 and the median forecast of 59.0 among economists polled by Reuters...

Earlier Thursday, the government reported that new claims for U.S. unemployment benefits unexpectedly slipped by 2,000 last week, signaling a solid U.S. job market. The jobless claims reinforced the view of strong private-sector job growth signaled by data in the ADP National Employment Report released on Wednesday...

Pending sales of U.S. homes increased unexpectedly in May, reversing three straight monthly declines, said the National Association of Realtors. The group's pending sales index rose 1.3 percent to 113.4 in May, above the forecasted 111.2...

The Mortgage Bankers Association said on Thursday its mortgage application index rose 5.9 percent last week as interest rates on 30-year fixed-rate mortgages fell for first time in four weeks to 6.80 percent...

The International Council of Shopping Centers said on Thursday chain store sales rose by 2.6 percent in June from a year earlier, the slowest pace in three months.

Europe is not doing badly either, lower May factory orders in Germany notwithstanding. From Bloomberg:

German factory orders fell in May as the euro's appreciation against the dollar made the country's exports more expensive abroad.

Orders declined 1.2 percent from April, when they jumped 4 percent, the Economy and Technology Ministry in Berlin said in a faxed statement today. Economists expected orders to be unchanged, the median of 32 forecasts in a Bloomberg News survey showed. From a year ago, orders increased 17.3 percent...

In a two-month comparison, which smoothes out short-term fluctuations, manufacturing orders grew 1.3 percent in May and April from March and February, with foreign orders slipping 0.3 percent and domestic orders up 3.3 percent.

And retail sales in the euro zone rose in June, according to a survey.

A seasonally adjusted index of retail sales in the dozen euro nations reached 55.1, the second highest since the survey began in January 2004, down from 56.3 in May, according to a survey for Bloomberg LP by NTC Economics Ltd. A reading above 50 signals growth. Sales rose from last year for a third month.

So there are good reasons for European Central Bank President Jean-Claude Trichet to recommend vigilance on inflation yesterday, as Bloomberg reports.

"We will exercise strong vigilance to ensure that risks to price stability don't materialize," said Trichet at a press conference in Frankfurt. A "progressive withdrawal of monetary accommodation remains warranted" if growth picks up and inflation stays "elevated," he said.

The bank's 18-member governing council today kept the refinancing rate at 2.75 percent...

The Bank of England also left interest rates unchanged yesterday. But many economists expect a hike later this year. And that expectation is likely to have been reinforced with yesterday's reports of higher mortgage equity withdrawal in the first quarter and a jump in manufacturing output in May.

The next interest rate hike from a major central bank, however, looks likely to come from Japan, especially after its index of leading indicators rose to 75.0 in May from a revised 54.5 in April. But in a speech yesterday, Bank of Japan Governor Toshihiko Fukui gave few hints on interest rates. From The Japan Times Online:

"Looking ahead, a sustained economic expansion is likely to continue, with a positive cycle of production, income and spending," Fukui said in a presentation at a quarterly meeting of BOJ branch managers.

With respect to monetary policy, Fukui avoided mentioning when interest rates may be hiked, saying only that the central bank aims to contribute to sustained growth and price stability by steering monetary policy via close monitoring of economic and price conditions.

Thursday, 6 July 2006

Economic data from the US and eurozone point to higher interest rates

It looks like those waiting for a pause from the Federal Reserve may have to be patient. From Reuters:

In a sign of strong manufacturing and business spending, factory orders climbed 0.7 percent in May despite a drop in orders for transportation equipment, Commerce Department data showed...

Excluding transportation, orders advanced 1.2 percent in May. Factory orders were also higher when defense equipment was stripped out, growing 0.8 percent in the month...

Orders for durable goods, expensive items meant to last three years or more, slipped 0.2 percent, an improvement from the originally reported 0.3 percent decline...

Another report showed U.S. private sector employers created an estimated 368,000 jobs in June, compared with 122,000 jobs in the previous month...

Meanwhile, U.S. chain store sales slipped in the latest week as slowing customer traffic and flooding in the U.S. Northeast crimped activity, according to one report.

And corporate earnings growth continues to look strong.

For the second quarter, earnings are now expected to rise 9.7 percent, up slightly from estimates a week ago of a 9.5 percent increase, Reuters Estimates said.

But it said the growth number should reach 12 percent once all companies have reported, which would mark the 16th straight quarter of double-digit gains for S&P 500 companies.

Data on the eurozone economy are also pointing towards higher interest rates. Bloomberg reports:

European service industries expanded the most in six years in June, adding to evidence that the region's economy would be able to withstand higher interest rates.

An index based on a survey of 2,000 purchasing managers at service companies such as banks and airlines in the 12 nations sharing the euro jumped to 60.7 from 58.7 in May, a report by NTC Economics Ltd. for Royal Bank of Scotland Plc showed. A reading above 50 indicates expansion...

An increased willingness among consumers to buy is giving companies more room to raise prices. Producer-price inflation accelerated to 6 percent in May, the fastest in more than five years, Eurostat, the European Union's statistics office in Luxembourg, said yesterday.

But eurozone retail sales fell unexpectedly in May. From AFX/Forbes:

Retail sales fell 0.6 pct from April and were up 0.8 pct year-on-year, EU statistics office Eurostat said...

The May decline was largely the result of a sharp drop in German retail sales, which fell 2.2 pct month-on-month...

The UK economy, meanwhile, continues to muddle along. Yesterday, the British Retail Consortium reported that shop prices edged up just 0.01 percent in June, while Reuters reported that the UK services sector slowed, the Chartered Institute of Purchasing and Supply/RBS business activity index easing to 58.7 in June from 59.2 in May.

We may get a better idea on the outlook for eurozone and UK interest rates later today when the ECB and BoE announce their interest rate decisions.

Tuesday, 4 July 2006

Manufacturing PMI down in US and Japan but up in Europe and China

US manufacturing may be slowing, as Reuters reports:

An index of national factory activity, released by the Institute for Supply Management, fell to 53.8 in June from 54.4 in May, falling short of economists' forecasts for a rise to 55. A reading above 50 indicates growth in the factory sector.

But the data is ambiguous.

The prices paid index fell to 76.5 in June from 77.0 May, while new orders, an indicator of future growth, rose to 57.9 in June from 53.7 in May.

The employment number in the report dipped to 48.7 from 52.9 in May, the first time it had been below 50 since October 2003.

Among other indicators released yesterday, construction spending fell 0.4 percent in May while auto sales, especially by US automakers, fell in June.

In Japan, the tankan survey showed Japanese firms getting more optimistic.

The headline diffusion index (DI) for big manufacturers' sentiment was plus 21, higher than a reading of plus 20 in March... The September index was seen at plus 22, showing firms expect conditions to improve over the next three months. The tankan...also showed big firms expect their capital spending to rise 11.6 percent in the year ending next March...

Ironically, Japan was the other major economy that saw its PMI deteriorate in June.


The net result was that global PMI was unchanged in June from May.

Global PMI55.055.0=
New Orders56.357.3+
Input Prices71.871.9+

The good news from the global report is that the new orders sub-index was up. The bad news is that the input prices sub-index was also up. Looks like demand is meeting supply constraints. Again from the global PMI report:

At 44.4 in June, the Global Manufacturing Suppliers' Delivery Times Index signalled a further marked decline in average vendor performance. The sharpest lengthenings of lead-times were generally recorded in the Eurozone, although the US, Japan and China also reported delays in the receipt of purchases from suppliers.

Monday, 3 July 2006

Stock market rally may not last

It has been a testing month or two for stock investors with most stock markets experiencing major corrections. However, the recent recovery in stock prices and suggestions of a possible end to interest rate hikes by the Federal Reserve have given some investors hope that markets are past their bottoms, a hope that, unfortunately, may not be well founded.

After a steep fall in May and early June, stocks recovered a little in the second half of June. 29 June in particular saw the Standard & Poor's rise 2.2 percent, its biggest one-day percentage gain since October 2003. The S&P 500 was flat for June as a whole but is now up 1.8 percent since the beginning of 2006.

It is a similar story in other markets. Japan's Nikkei 225 edged up 0.2 percent in June, Britain's FTSE 100 rose 1.9 percent while the volatile Sensex index of Indian stocks climbed 2.0 percent.

That leaves most major stock markets in positive territory again for 2006, with the notable exception of Japan's, which had suffered a particularly steep fall since hitting its peak in April.

30 June
S&P 500 1,248.291,270.201.8
Nikkei 22516,111.4315,505.18-3.8
FTSE 1005,618.85,833.43.8
CAC 404,715.234,965.965.3
Hang Seng14,876.4316,267.629.4

All this looks relatively good for stock investors, but not everyone is jumping to buy stocks. In fact, the jump in stock prices on 29 June specifically elicited a warning from MarketWatch's Mark Hulbert: "The stock market's huge rally Thursday afternoon was a knee-jerk reaction that will get corrected as soon as investors seriously examine the rationales that were used to justify that rally."

It was a bold prediction, but the stock market duly obliged. The very next day, the S&P 500 fell, albeit marginally by 0.2 percent.

However, if Hulbert's reason for a correction is correct, there will probably be more declines to come.

As Hulbert wrote, the reason the market rallied was that the Federal Reserve, in raising interest rates by 25 basis points that day, had also signalled that its rate-hike cycle might soon come to an end. Hulbert noted that the stock market usually performs better when rates are lower than when they are higher.

However, he also pointed out that the expected end to rate hikes is likely to be accompanied by economic weakness. He quoted Jeffrey Hirsch of the Almanac Investor Newsletter as saying: "When the market rallies because the Fed says the economy is weakening you are in trouble."

Hulbert also cited research by James Stack, editor of the InvesTech Research Portfolio Strategy newsletter, which showed that the S&P 500 tended to fall within a year of the end of a rate-hiking campaign.

So if history repeats itself, there are more stock market declines to come.

Having said that, however, it is probably worthwhile asking how much of a factor the Federal Reserve's statement was in the rally. John Mauldin, president of Millennium Wave Advisors, LLC, pointed out in a commentary on 30 June that in the previous day's surge, much of it occurred before the Federal Reserve made its announcement. He suggested rather that "end of the quarter gamesmanship, with funds working to move their favorite stocks up", was also a factor.

Indeed, the S&P 500 had made its recent bottom on 13 June, about a fortnight before the interest-rate decision. Other markets around the world had also made bottoms around the same time. In other words, stock markets were already recovering from their recent falls before the latest Federal Reserve meeting.

Rather, perhaps the main significance of the Federal Reserve statement was that there was nothing in it to short-circuit a rally that was already developing.

Also an important consideration is the fact that the fall in global stock markets that started in May had been quite violent. When markets fall so far so fast, they usually take a breather at some point, when the initial panic selling dissipates and traders cover short sales. That is probably what is happening right now. It may or may not subsequently lead to a sustainable rally.

If the opinion of the newsletters cited by Hulbert is anything to go by though, it probably will not.

Some analysts point to the S&P 500's rise above its 200-day moving average as an indication that a long-term rally is underway, the theory being that when the index is above its average, it indicates that the trend is up, and when the index is below, it indicates that the trend is down. Unfortunately, this technique has not given reliable signals lately.

On 23 May, the S&P 500 closed below its 200-day moving average. The very next day, it closed above the average, and remained above the average until 7 June, when it again closed below the average. This time, it stayed below the average until the rally of 29 June. Despite the decline on 30 June, it remained above the 200-day moving average.

Does this mean that we have started on a new bull market? Perhaps, but going by that logic, the chart of the S&P 500 above would show that the US stock market has had about half a dozen bull markets and half a dozen bear markets in the past three years or so.

That sounds like a lot of bull to me.

Saturday, 1 July 2006

US core inflation "contained" but other economies heating up along with World Cup

Plenty of economic data yesterday to chew on.

The US Commerce Department reported yesterday that personal income increased 0.4 percent in May, disposable personal income increased 0.3 percent and personal consumption expenditures increased 0.4 percent. The PCE price index increased 0.4 percent in May, compared with an increase of 0.5 percent in April. The PCE price index excluding food and energy increased 0.2 percent, the same increase as in April.

Reuters summarises that report, suggesting that "core inflation remains contained" but Americans still "borrowed more and saved less to support their shopping habits", pointing to a personal saving rate of negative 1.7 percent.

Other data highlighted in the Reuters story:

The University of Michigan's consumer sentiment index ended at 84.9 in June, up from the final May reading of 79.1...

The Economic Cycle Research Institute said its index on U.S. economic growth slipped to 136.0 last week from a downwardly revised 136.7 in the prior week...

However, the...National Association of Purchasing index fell more than expected in June to 56.5, its lowest since February... Its prices paid component jumped in June to 89.0, hitting an 18-year high, NAPM-Chicago said in a press release.

While Reuters may have described core inflation as mild, various measures of overall and core PCE inflation seem to be picking up pace recently, as shown by Mark Thoma at Economist's View. In fact, consumer spending in nominal terms in the second quarter has actually not been too bad, but real spending has been weighed down by the pick-up in inflation. On the other hand, David Altig at the macroblog thinks that "there isn't much evidence to support the view that underlying inflation trend is increasing -- or decreasing".

While the US data perhaps leaves some ambiguity on the direction of interest rates, other data yesterday suggest more rate hikes are coming elsewhere in the world.

Bloomberg reports some positive data from Europe:

The European Commission's index of sentiment among executives and consumers in the dozen euro nations rose to 107.2, up from 106.7 in May and the highest since March 2001. Consumer prices gained 2.5 percent, the same as the previous month, the EU's statistics office said in Luxembourg...

The commission today said in a separate report the economy is growing faster than it expected a month ago when it predicted a 2.1 percent expansion this year. The risks to that forecast are now "tilted to the upside," the quarterly report said...

In the U.K., Europe's second-largest economy, growth in the first quarter maintained the fastest pace of expansion in two years, a government report showed today. Growth of 0.7 percent from the previous quarter was above the predictions of all 31 economists polled beforehand...

Other official reports today showed French consumer confidence rose to minus 28 from minus 30. Demonstrating that weak spots remain, German retail sales had the biggest drop in two years in May, when they fell 2.2 percent from the previous month.

There was positive news from Japan as well yesterday. From AFP:

Japan's unemployment rate fell to 4.0 percent in May, the lowest since April 1998 and down from 4.1 percent in the previous month, the government said.

Meanwhile the core consumer price index (CPI) gained 0.6 percent in May from a year ago, in line with market expectations.

The core CPI in June for Tokyo -- the leading indicator for national price trends released -- was up 0.3 percent from a year earlier...

In May, household spending rose 1.3 percent month-on-month on a seasonally-adjusted basis but was down 1.8 percent from a year earlier.

I wrote on Thursday that some of the positive economic news appears related to the ongoing World Cup. Andrew Child at The Financial Times apparently agrees.

If the stats coming out of Europe this week are to be believed, football seems to be the economic driver of the moment. That’s right – football. You won’t find too many mentions of that in many textbooks. But the football showcase that is the World Cup in Germany does seem to be providing a pleasing distraction from inflation-led economic uncertainty.

Pleasing distraction indeed, especially for the Germans and Italians.